Quantum Leap. With these words, Prime Minister Ana Brnabić and President Aleksandar Vučić described the plan ‘Serbia 2027,’ which is expected to lead to an average salary of around 1,400 euros in four years, compared to the current 768 euros as of the end of November last year. By the end of 2027, the gross domestic product is projected to reach 92 billion euros, up from the current 69 billion euros expected by the end of this year.
According to this plan, Serbia will spend a total of 15.2 billion euros on capital investments in 2025, 2026, and 2027, approximately five billion euros annually.
In comparison to what is budgeted for this year, there might be an increase in living standards and gross domestic product, but there is no investment leap. This is because allocations for public investments exceeding five billion euros are already planned in the state budget for the year 2024.
To avoid confusion, this is not a small amount, as it represents about seven percent of the gross domestic product (GDP), which is a significantly higher level compared to comparable countries in the region. Not long ago, capital expenditures were around two to 2.5 percent of the GDP, and in progress reports from the European Union, we were advised to reach the desirable five percent of GDP. The Fiscal Council reports also suggested the same.
We have surpassed that level for four consecutive years, and that is a fact. However, it is also a fact that the announced investment plan does not anticipate growth compared to this year’s investment balance of the state.
Even though a total of 15.2 billion euros over three years may sound like a substantial amount and a significant increase in public investments, the annual expenditure on capital investments would essentially be at the level of this year’s.
The amount of five billion for this year is reached by adding up the expenditures from the republic budget (four billion euros) allocated for capital investments along with transfers for public investments at the local level.
External recessionary pressures
One old analysis from the Fiscal Council dating back to 2014 shows that capital expenditures have the most significant positive impact on economic growth and can effectively offset recessionary pressures. However, unlike the recessionary pressures that were internal at that time, primarily due to announced fiscal consolidation measures involving salary and pension cuts, this time the recessionary pressures come from external sources.
This may be the first reason why policymakers have decided to maintain this high level of public investments in the coming period. The Eurozone, by a narrow margin, avoided a recession. After a 0.1 percent decline in the third quarter, growth was zero in the fourth quarter! Germany, the largest European economy and an important external trade partner for us, recorded poor economic results, declining by 0.3 percent.
Why is this important for us? Because out of a total of 26.4 billion euros, which Serbia exported during the first 11 months last year, exports to the EU amounted to 16 billion euros, which is a significant 66%. The majority of goods and services were exported to Germany (around four billion euros), with the total trade reaching nine billion euros, doubling in the last few years, as announced by the German ambassador. According to the Business Registers Agency, companies founded by EU companies in Serbia employ as many as 280,000 people. German companies in Serbia employ about 80,000 workers.
With all this in mind, it is clear that the policymakers are attempting to mitigate and reverse certain recessionary trends coming from abroad with this substantial investment plan.
Moreover, this was confirmed on Tuesday, January 31st, by Peter Tabak, the Chief Economist for the European Bank for Reconstruction and Development (EBRD) for the Western Balkans region, during the presentation of the Transition Report. He provided an assessment that the economic growth of the Serbian economy this year will be 3.5%, and public investments, including those for Expo, will contribute to this.
However, this plan is essentially Expo plus. Because, as comparative data from countries that have organized smaller Expos show, the exhibition itself costs from two to three billion. Here, all other infrastructure projects have been added to the list, which are not just accompanying content for Expo.
Possible risks
So, what could be a problem for the Serbian economy when it comes to implementing this plan? The first risk could be a quantum leap in public debt under these borrowing conditions on the international financial market. Because, of course, these projects are financed through loans, and the interest rates at which Serbia borrows are significantly higher than the expected economic growth rate. On the secondary market, our long-term euro-denominated bonds are traded with interest rates ranging from 4.51% to 5.44%. Dollar-denominated bonds carry an even higher interest rate, ranging from 5.7% to 6.23% at the close of January 31st. This is the cost at which Serbia could borrow on the international financial market if it were to issue euro-denominated bonds.
Borrowing has also become more expensive on the domestic financial market. Recently, eight-year government bonds in dinars were sold at a yield of 6.3%. For the state, this is a slightly more favorable interest rate than in October when these debt securities were issued with an interest rate of 6.39%. However, this also means that the conditions for borrowing on the domestic market do not differ much from those on the foreign capital market.
However, within this unfavorable fact lies a piece of good news. Since domestic bonds are issued in dinars, it implies that, concerning the national currency exchange rate, the market does not anticipate a weakening of the dinar over the next eight years. This is quite a bold bet, especially if the buyers of these government debt securities have literally placed their money on it, buying dinar-denominated bonds at a price almost equivalent to foreign currency. If they had expected the dinar to weaken, yields, or interest rates, would have been even higher.
Incidentally, investors on the domestic capital market have playfully dubbed these debt securities as “Expo bonds.” The total volume of the issuance is around 110 billion dinars, which is slightly less than one billion euros.
This could lead to another conclusion: that Finance Minister Siniša Mali might be planning to enter the international capital market, as the budget outlines a total borrowing of two billion by issuing securities on both domestic and foreign markets.
But this is not the only source of funding for the “Serbia 2027” projects.
Borrowing from international financial institutions, such as the World Bank or the European Investment Bank, is cheaper because it usually involves loans of smaller amounts. Borrowing is also cheaper with Chinese banks, and as seen in the budget for the year 2024, it continues to range from three to 3.5 percent. However, the issue with Chinese loans is that they mainly support projects for which both Chinese and Serbian taxpayers have a strategic interest.
Special and expedited procedures
The second problem could be the selection and choice of projects. This procedure is clearly outlined in the Regulation on the Management of Capital Projects from 2019. However, it includes an extensive list of rigorous criteria for a capital project to be included in the budget.
Firstly, the project must cost more than five million euros, and, among other things, a feasibility study must be submitted to the audit commission for each project. Furthermore, this document must be made public. However, different rules apply to these projects, especially when it comes to the Expo exhibition. In early 2020, the Law on Special Procedures for Linear Projects was adopted, stipulating that all projects labeled as “projects of special importance for Serbia” can be implemented through special and expedited procedures.
What does this mean? It means that the existing regulations will not apply to them. Decisions will be made faster, contracts can be concluded without a tender through direct agreements, and there won’t be a need for expropriation. In other words, they become a priority under an expedited procedure.
For example, this special law applies to two sections of the highway, Preljina-Požega and Požega-Boljare, as well as to the Morava Corridor, specifically the section from Pojate to Preljina.
On the list of priority projects are also the Belgrade-Sarajevo highway, the Fruška Gora Corridor (the section from Novi Sad to Ruma), and the highway from Niš to Merdare, for example.
The legislative intention is clear – expedited procedures are intended to speed up the construction sector. An example of this is the past year, where the construction sector recorded a remarkable growth of 12.8% in the third quarter. Construction significantly contributed to the economic growth last year, and the abolition of the conversion of usage rights into ownership rights also played a role. In a situation where recessionary trends from Europe and the surrounding region are being imported, the construction sector is an important source of growth for the Serbian gross domestic product.
What then is the problem? Procedures like expedited ones and those without tenders always raise concerns about corruption. Moreover, an old analysis from the Fiscal Council showed that corruption in Serbia consumes one percent of the gross domestic product. Furthermore, Serbia has regressed on the list of countries based on the perception of corruption. Out of 180 countries, our country is ranked 104th, as recently announced by Transparency Serbia. On the regional list, only Bosnia and Herzegovina are ranked lower than us.
Another challenge for the implementation of these large investment projects can be a shortage of labor. Large infrastructure projects, as an economic stimulus, are typically implemented when unemployment is high. However, in Serbia, unemployment is less than 10 percent, meaning that the domestic labor market may not be able to meet the needs of the state as an investor.
It is clear that the Protocol on the Implementation of the Conditions for Free Access to the Labor Market in the Western Balkans, recently signed in Skopje, is an integral part of this Expo economic puzzle. Citizens of Serbia, North Macedonia, and Albania will have free access to the labor market in all three countries starting from March 1. This is all part of the Open Balkan process, through which the necessary workforce can be more easily imported.
American and Serbian New Deal
A good example of how infrastructure projects increase economic growth and reduce unemployment is certainly the New Deal in America, which was implemented by President Franklin D. Roosevelt in 1933, after the Great Depression. At that time, unemployment in America was already higher than 20 percent.
In addition, America finances itself by printing money, so a higher public debt does not necessarily imply greater dependence on external creditors. The fundamental difference between the American and Serbian economies is that we are import-oriented, while the American economy is export-oriented.
However different the Serbian and American New Deals may be, there is one similarity regarding the political reasons for implementing this project. And these reasons may not be so obvious.
These reasons do not relate to the fact that the name of the plan “Serbia 2027” coincides with the year of the new regular parliamentary elections. By then, this investment program will deliver some results.
They also do not relate to the proximity of regular local elections in the spring. This plan does not only foresee investments at the Belgrade level but also at the local level. The way investments are distributed might remind one of the long-forgotten political idea of Mlađan Dinkić, “strong regions, strong Serbia.” Just for Kragujevac, for example, 17 investment projects are planned, including the “Čika Dača” stadium.
The most significant political similarity with the New Deal is in the tone President Aleksandar Vučić used when addressing his political opponents.
“This has nothing to do with politics. I invite all those who do not like me, who do not like us, to participate in this, to earn money, to fight for the Serbia they dream of,” said President Vučić at the end of the presentation of the “Serbia 2027” program.
Roosevelt, a Democrat, in the 1930s, also urged his political opponents, the Republicans, to accept his investment plan.
“Here and now, I call on all those Republicans whose conscience cannot reconcile with the failure of their party leaders to join us,” Roosevelt said at that time.
Both of them used the term inclusivity.
This simply means that if the government expects this project to be inclusive or generally accepted, then even business owners who do not support the government will have to earn from it.
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